CEO Type and Earnings Management to Avoid Loss or Earnings Decreases: Evidence from South Korea

Abstract

This study examines the relations between the CEO type (owner CEO vs. professional CEO) and earnings management over 9,266 firm-years from 2011 to 2020 in Korea. Two earnings management measures, accrual management and real activity management (abnormal cash flow from operations, abnormal production cost, and abnormal discretionary expense), are considered as means to avoid reporting losses or earnings decreases. We partition the sample into two groups based on the type of CEO (owner CEO vs. professional CEO) and investigate whether earnings management is used for achieving earnings targets (small profit or small earnings increases) for each group. We find all earnings management measures are significant at the 5% level or better in the direction of aggressive earnings management in the owner CEO sample, while all but one measure (abnormal production cost) are insignificant in the professional CEO sample. Our findings suggest that an owner CEO is more likely to manage earnings to achieve small profit or small earnings increases compared to a professional CEO.